The Cost of Financing U.S. Government Debt

The Issue:

The share of government spending devoted to paying interest on the United States’ government debt has risen sharply since 2020 and already exceeds what the government spends on defense. The outlook for the burden of the debt over the next decade has steadily worsened, as projections of debt interest costs have been revised upwards with successive forecasts. The tax bill passed by Congress and signed into law on July 4 by President Trump is projected to increase government deficits by $3.4 trillion over the 2025-2034 period, increasing debt as a share of GDP to 124 percent by the end of 2034, according to the Congressional Budget Office (CBO). Higher interest rates will add to the cost. But, since the government borrows by issuing Treasury securities that range in maturity from a few weeks to 30 years, the actual cost of servicing the debt will depend not just on the level of outstanding debt but also on interest rates of various maturities and the timing of the turnover of the debt as existing bonds mature and new debt must be sold. If interest rates are higher than the CBO projects, then the interest burden of this debt will quickly become higher than currently estimated because a large share of the government’s debt is in shorter-term securities that will be rolling over in under a decade.

The actual cost of servicing the debt will depend not just on the level of outstanding debt but also on interest rates of various maturities and the timing of the turnover of the debt as existing bonds mature and new debt must be sold.

The Facts:

• The US federal debt as a share of GDP is close to its highest level ever and projected to keep increasing. Government debt is the sum of current and accumulated past budget deficits as well as the cumulative cost of financing those deficits. Debt-to-GDP levels over the past five years have been higher than at any time since the late 1940s, and as of the end of the 2024 fiscal year debt held by the public stood at almost 98 percent of GDP. The “One Big Beautiful Bill Act,” H.R.1, further increases the government’s debt, largely through increasing the size of primary deficits. The primary deficit is the difference between tax revenues and government expenditures, excluding interest payments on the debt. The tax bill cuts an estimated $1.1 trillion in government spending over 2025-2034, but the major impact on the budget comes from reductions in tax revenues in the order of $4.5 trillion over the same period that arise largely from making tax cuts made in the 2017 TCJA tax law permanent. 
• Interest payments on the debt as a share of government outlays have risen sharply since 2020. Even before the passage of H.R. 1, debt interest payments had risen sharply due to the combination of increasing government debt and higher interest rates. Interest payments on the debt were below 6% of government outlays in 2020 but rose sharply to about 13% of government expenditures by 2024, exceeding the government’s expenditures on defense. The cost of servicing this debt depends on the level of interest rates. The long decline in interest rates since 1980 reduced the interest burden of our growing stock of debt, but with interest rates increasing since 2020, the net interest burden of servicing government debt has increased. The cost of servicing the debt is projected to keep increasing over the next decade, and this worsening outlook is illustrated by the sequence of upward revisions in forecasts between 2020 and January 2025 before H.R. 1 was signed into law (see chart below). 

• Back-of-the-envelope analyses of the interest burden of the debt often use interest rates on 10-year government debt as a shorthand proxy for the cost of government borrowing, but the United States Treasury borrows at different maturities, so a range of interest rates affect the interest cost of financing the debt. The US Treasury has an Office of Debt Management that has the objective of funding the government at the least cost to the taxpayer over time. Some borrowing is short-term, other borrowing comes in the form of bonds with maturities of up to 30 years. Interest rates differ across maturities and these rates do not change in lockstep. As interest rates fall or rise, the pace at which these changes get reflected in net interest spending depends on the maturity structure of outstanding debt, since this maturity structure determines how quickly the outstanding debt will have to be refinanced at the new interest rates. 
• Deciding the “right” maturity structure for government debt involves tradeoffs between paying higher interest and assuming rollover risk. Typically, yield curves — which plot interest rates at different maturities — tend to slope up, meaning that borrowing at longer maturities carries higher interest rates. But it also locks in financing at those rates. Shorter maturities typically have a lower interest cost, but since short maturity bonds must be rolled over more frequently, this creates a risk that the government might need to borrow at extremely high rates during a crisis. This occurred during the pandemic recovery period, when the Federal Reserve tightened monetary policy in response to a burst of inflation. That tightening raised the benchmark Federal Funds interest rate from near zero in March of 2022 to a range of 5.25-5.5% in July of 2023. Most of the outstanding debt in late 2022 was scheduled to mature within the subsequent three years, so that debt has been refinanced at higher interest rates, sharply raising debt service costs over earlier forecasts (see here). There also may be some limit to the government’s ability to exploit any apparent upward slope in the yield curve by borrowing at the lower shorter-maturity rates. The slope of the yield curve reflects supply and demand in the bond market, and borrowing more in the form of short-term debt may disproportionately increase yields at that maturity.  
• The maturity structure of U.S. Government debt is heavily weighted towards the short term. Over 20 percent of the currently outstanding debt will need to be refinanced in fiscal year 2025. More than 80 percent of the currently outstanding debt will mature within 10 years, and, by face value, 61 percent of our currently outstanding government debt will mature by the end of fiscal 2028 (see top chart). With shorter-maturity borrowing, changes in interest rates will quickly pass through to government interest payments on the debt. The current profile is not particularly short by recent historical standards; the average weighted average maturity of Treasury borrowing has been about 5 years over the period since 1980, and since 2020 has been closer to 6. However, this average masks the fact that most debt is maturing before six years, as shown in the chart – the weighted average is heavily influenced by the inclusion of the very long 30-year bond.
• Higher interest rates will add to the cost of servicing the debt. H.R.1 is expected to contribute to higher interest rates, as changes in tax law can have impacts on the rate of economic growth, inflation, and interest rates. In the short run, the Congressional Budget Office estimates that H.R.1 would increase aggregate demand, increase employment, and put modest upward pressure on inflation. This inflationary pressure would likely slow the pace at which the Federal Reserve lowers interest rates relative to what the CBO had projected in January. As a result, the CBO projects that the bill would increase interest rates on 10-year Treasury notes by an average of 14 basis points over the 2025-2034 period relative to CBO’s January 2025 projections. A 14 basis point increase in interest rates would add another $441 billion to the effect of this tax bill on net deficits over the next ten years. Concerns about the independence of the Federal Reserve could also lead to higher rates of expected inflation, which would cause investors to demand higher interest rates to compensate them for the expected erosion of the value of the dollar, something that has happened in the past when the President attempted to influence monetary policy.